Is Predatory Lending Illegal and What You Need to Know

Predatory lending is a serious issue that affects many people, often with devastating consequences. In the United States, for example, predatory lenders have been known to target low-income and minority communities with unfair and abusive lending practices.

Predatory lending can take many forms, including payday lending, title lending, and mortgage lending. Payday lenders, for instance, often charge exorbitant interest rates and fees, trapping borrowers in a cycle of debt.

The Consumer Financial Protection Bureau (CFPB) has taken steps to regulate predatory lending practices, but more work needs to be done to protect consumers. In some states, predatory lenders have been known to operate with little to no oversight, leaving consumers vulnerable to exploitation.

In the worst-case scenario, predatory lending can lead to financial ruin, including bankruptcy, foreclosure, and even homelessness.

Predatory lenders often create loans based on a borrower's equity, regardless of their ability to pay. Some mortgage brokers and loan officers are motivated by the desire for fees generated by these loans, which can lead to homeowners struggling to afford their payments.

Mortgage companies may prioritize earning commissions over the consequences for the lenders they work for. This can result in homeowners being saddled with unaffordable loans.

Some lenders may be motivated by the possibility of foreclosing on houses, which can then be resold at a profit. This can be particularly true when there is a substantial amount of equity in a home.

Fraud and abuse are common tactics used by predatory lenders to take advantage of vulnerable borrowers. Outright fraud or abusive practices are often directed towards minority, elderly, and less knowledgeable borrowers.

Scare tactics, threats of ruined credit, bullying, document switching, and plain lying are all methods used to deceive borrowers. These tactics can be particularly effective on those who are not well-informed or are under pressure to make a decision quickly.

Here are some common loan abuses to watch out for:

Be cautious of lenders who promise loans with attractive terms, but have hidden fees or clauses that benefit the lender. Remember, if it sounds too good to be true, it probably is.

Predatory lenders often use scare tactics to intimidate borrowers into making bad decisions.

They may threaten to ruin your credit if you don't agree to their terms, or bully you into signing documents you don't understand.

Outright fraud or abusive practices are typically directed toward minority, elderly, and less knowledgeable borrowers.

Methods include document switching, where the lender switches out important documents at the last minute, and plain old lying.

Some lenders will even add unknown signers to documents to make loans seem more affordable.

Here are some warning signs of predatory lenders:

These tactics are meant to confuse and intimidate you into making a bad decision. Remember, if it sounds too good to be true, it probably is!

Home improvement scams are a serious issue that can leave homeowners in a tough spot. Some contractors deliberately target lower income and elderly homeowners, using high pressure tactics to sell unneeded and overpriced contracts for so-called improvements.

These scam artists often charge more than their quoted prices, or their work doesn't live up to their promises. Homeowners may be left with shoddy or incomplete work that they're forced to pay for.

Contractors who engage in home improvement scams may threaten to put a lien on the home or even force the homeowner into foreclosure if they refuse to pay. This can be a devastating experience for those who are already struggling financially.

High interest rates are a common trait of predatory loans, often much higher than what insured banks and credit unions offer. This can be a tip-off that a loan might be predatory.

Be cautious of loans requiring high "points", fees, and other closing costs, as these can add up quickly and increase the overall cost of the loan. The difference between the loan interest rate and the disclosed Annual Percentage Rate (APR) can indicate higher fees.

Mandatory arbitration clauses favoring lenders are also a red flag, as they may indicate that the lender has chosen arbitrators who will favor their interests.

Loan packing is a sneaky tactic used by some lenders to add unnecessary financial products to your mortgage. This can include credit or mortgage protection insurance that pays off your mortgage at death, even if you didn't ask for it.

A lender might pack these extra products into your loan to increase their profits. This can be a major problem for borrowers, as they may end up paying for products they don't need or want.

Loan packing can be especially problematic when it comes to credit or mortgage protection insurance. This type of insurance pays off your mortgage at death, but it's often unnecessary and can be very expensive.

Borrowers should be cautious of lenders who try to sell them on these types of products. It's essential to carefully review your loan documents and ask questions about any extra fees or products that are being added to your loan.

In some cases, lenders may not even disclose these extra fees or products to borrowers. This is why it's crucial to carefully review your loan estimate and ask questions about any vague-sounding items, such as "administrative fees."

Balloon payments can be a major concern for borrowers, especially those with subprime loans. About ten percent of these loans are structured with a balloon payment, which requires the borrower to pay off the remaining loan balance in full after a certain period.

You might start with a loan that has a low interest rate and low monthly payments, but then get hit with a large balloon payment. This can be a huge financial burden, and if you can't pay it, you could lose your home.

In some cases, lenders will offer to refinance the loan into a new mortgage with a fixed interest rate, but this can involve more fees for the lender.

Negative amortization is a loan term where the borrower's loan balance increases every month despite making regular payments. This is because the repayment amount is structured to cover only the interest, not the principal.

Predatory lenders use negative amortization to win over borrowers with low payments, but fail to disclose that the principal balance will rise and the required payment will increase substantially. Typically, this happens after five years.

Your lender should provide you with an amortization schedule that shows how much of the interest and principal balance you're paying off throughout your loan term. This will help you understand the loan's progress and potential issues.

If your loan balance keeps increasing, it may be a sign of negative amortization. Borrowers may not find out about this until they call the lender to inquire why the loan balance keeps rising.

Predatory lending can have serious consequences for borrowers, including excessive debt, financial ruin, and even foreclosure. It's essential to know how to spot and avoid these practices.

If you're having trouble finding an attractive mortgage rate, it might be a sign that your credit score needs work. Shopping around for mortgage and refinance rates can help you understand what's considered typical.

To protect yourself from predatory lenders, take a homebuying class, which are often low-cost or free. You can also contact a certified housing counselor, who's really good at spotting predatory lending.

Here are some red flags to watch out for:

To avoid predatory lending, compare mortgage rates and fees to understand what's considered typical. If you're having trouble finding an attractive rate, your credit score might need work.

Ask for guidance from experts, such as certified housing counselors or homebuying classes, which are often low-cost or free. These experts can help you spot predatory lending practices.

Know the signs of predatory lending, including excessively high interest rates and "junk" fees. These are major red flags that can put you at a disadvantage.

Before working with a lender, check their reputation by looking up complaints in the Consumer Financial Protection Bureau's database and on the Better Business Bureau website. A simple Google search can also reveal news about the lender's practices.

Make sure your loan officer is licensed, as lenders are required to obtain a license from the state in which they operate. You can ask to see their license, and if they can't provide it, find another lender.

When finalizing loan documents, be wary of blank areas that the lender will fill in later. This is a tactic used by predatory lenders to confuse and trick you into signing unfavorable terms.

If you suspect you've been a victim of predatory lending practices, contact the CFPB and your state consumer protection organization.

The CFPB has a portal where you can submit a complaint, which is a good starting point. Be prepared to provide detailed information about your experience.

You can also reach the CFPB by phone on weekdays at 855-411-2372, a convenient option for those who prefer to speak with someone directly.

Predatory lenders are still out there, so it's essential to be vigilant when taking out a loan.

High interest rates are a major red flag for predatory loans, often much higher than what insured banks and credit unions offer. This is especially true for those with lower credit scores, who will likely pay even higher interest rates.

Unusually high "points", fees, and other closing costs can also indicate a predatory loan. Compare the loan interest rate to the disclosed Annual Percentage Rate (APR) to see if the difference is unusually large.

Requiring credit life insurance with loans is a common predatory tactic. This can be a sign that the lender is trying to take advantage of you.

Mandatory arbitration clauses favoring lenders are another warning sign. This means that disputes between borrowers and lenders must be arbitrated by parties chosen by the lender, which can be biased in their favor.

Lenders promising loans for much higher amounts than required can be a sign of predatory lending. This is because lenders make their money based on the amount borrowed, so there's no reason to borrow more than you need.

A loan-to-value ratio greater than 100 percent of the property's value is a sign that the lender is taking on too much risk. This can be a sign of a predatory loan.

Refinancing lower-interest rate loans at higher rates can be a trap for unsuspecting borrowers. This can lead to paying more interest over the life of the loan, even if the monthly payments seem lower.

Prepayment penalties are a major red flag for predatory loans. These extra charges for paying off the loan before its maturity date are a sign that the lender is trying to keep you in debt for as long as possible.

Inflated or fraudulent appraisals can also be a sign of predatory lending. A reputable lender will not offer loans that exceed the property's actual value.